By RC Victorino, CrowdfundBeat Guest Editor,
Startup capital is the lifeblood of any young company looking to find its footing, which is why so much time and effort is dedicated to fundraising during these early stages. It takes a significant amount of capital to grow a business at a healthy pace. Hiring, marketing, infrastructure, technological implementations, product development – no startup can afford to do without these components. Even the slightest disruption in startup capital can be devastating.
Historically, fundraising has always been a full-time effort, requiring dedication, time, and focus in order to successfully target investors, cultivate relationships, and nurture business partnerships.
But the startups of today are given far more opportunities than their counterparts from even a decade ago. With the introduction of Titles II and IV of the JOBS Act came new equity crowdfunding laws that changed the way private companies could raise capital.
With the new law in place, startups are—within the confines of the rules—allowed to publicly advertise their fundraising ventures, while limiting investments to accredited investors.
The shift reflects the move toward web-based venture capital. It opens up more opportunities for accredited investors to invest in private startups. This, in turn, is good news for startups, which now have countless tools at their disposal to get their stories out there to the 8+ million qualified investors in the U.S.
But not all startups are taking advantage of these newfound opportunities. Despite having the ability to pursue public fundraising, a significant amount of young companies are choosing to pursue a non-public channel of equity crowdfunding.
Pursuing private equity crowdfunding
The advent of the equity crowdfunding platform has dramatically increased the number of potential investors startups have access to. Choosing to fundraise strictly through private accredited investor networks still has the potential of introducing thousands of investors to a company. In turn, entrepreneurs can, potentially, drive millions of dollars in fundraising.
This welcomed benefit associated with equity crowdfunding platforms has some startups assuming they have no need to expand to public channels.
But this isn’t always the case. Not all companies enjoy success by pursuing just a private equity crowdfunding channel. Furthermore, while putting yourself in front of thousands of potential investors is a great step toward achieving a company’s fundraising goals, startups still miss out on an even greater pool of investors if they choose to ignore the public fundraising channel.
Another likely reason why startups choose to avoid public equity crowdfunding is because of the confusion involving the associated rules and regulations. Not everything is made clear, quite yet, to the general public. Without a clear picture of the SEC regulations involving public equity crowdfunding, some entrepreneurs are choosing to stick to what they’re familiar with.
And yet there is another potential reason why private companies choose to forego public crowdfunding: ignorance. Many companies aren’t even aware that this type of fundraising is now SEC-approved. They might have pursued this avenue had they been informed of the option early on.
Pursuing public equity crowdfunding
With public equity crowdfunding comes every benefit associated with the web, including social media and more. Public fundraising provides the foundation for which expansive campaigns can be launched and nurtured.
This channel makes it easier for startups to connect with investors who weren’t a part of an equity crowdfunding platform, or who were unaware of the company’s existence. While some startups are hesitant to pursue this arena, there are those who recognize the positive impact public equity crowdfunding can have on building their brand, engaging their customers and establishing a far-reaching, interactive, marketing strategy.
Addressing the fear of the unknown – the legalities of public fundraising
The legalities surrounding public equity fundraising can be confusing, so much so that it drives some startups away. However, there are two basic requirements associated with public fundraising:
File a Form D online, and include that you’re using the 506(c) exemption within 15 days of taking in first funding into a given offering.
Verify the accreditation of your investors via income/tax statements, or from a certified letter written by the investor’s attorney or accountant (this is performed by many equity crowdfunding platforms). If the SEC discovers that a non-accredited investor took part in a publicly marketed investment round, your company would be banned from fundraising for one year.
Regulation A+ Offerings and non-accredited investors
Title IV of the JOBS Act has made it possible for non-accredited investors (everyday people) to take part in equity crowdfunding and investments of private startups. The new rules for Regulation A+ allow companies to raise up to either $20,000,000 or $50,000,000 (depending on one of two tiers). Non-accredited investors can invest up to 10% of their income/net worth per year.
However, there are a lot of costs associated in pursuing this option, thus limiting it as an option for early-stage startups without an existing strong financial backing.
Casting a wider net is an effective way to attract more investors
The concerns some startups demonstrate regarding public fundraising are understandable. Every new venture has its fair share of confusing parts.
But since fundraising can dictate the pace of growth for both established firms as well as startups, it’s worth investigating how best to get in front of as many potential investors as possible during, regardless of your stage in the business lifecycle.
The burden of choosing how and where to raise funds through crowdfunding can be weighty. However, with so many options made available to entrepreneurs, making this type of informed decision can set your company on a path toward perpetual growth.